Nearly four and a half billion people use the internet worldwide.
In 2019 alone, $3.46trillion was spent online by consumers, with an expected annual growth of between 15% and 20% for the foreseeable future. There’s no doubt – digital is big business. But how can you select the best business model to take advantage of hugely profitable digital distribution channels?
In this article, I’m going to explore some of the most popular digital business models out there. These are real world examples that you can emulate to reach more customers.
The Ever Changing Digital Landscape
Your digital business model is essentially how you make money. It’s how you convert your value proposition into something tangible. The fact that you will be distributing your product digitally, significantly affects the type of model available to you.
Digital trends are forever changing, and at an accelerated rate. As futurist Ray Kurzweil puts it in his book The Singularity is Near: “Technology goes beyond mere tool making; it is a process of creating ever more powerful technology using the tools from the previous round of innovation.”
This is so true of how digital businesses sell their products. It’s important to realize that new digital technologies continually dominate the tech landscape, and so businesses old and new must adapt to these new ways of doing things.
That being said, there are long standing business models that are extremely popular, and for good reason. Let’s look at these now.
This business model offers a digital download for free. It comes in three forms:
- Limited Function: This is where customers receive parts of the digital product, with the rest locked behind a paywall.
- Timed Functionality: Where a digital product is completely free and all features are available. However, this is for a limited time only. Usually 30 days or 6 months free. Once the allotted time passes, the digital product ceases to function without a purchase.
- Advertising: Some products will have a free version that is supported by advertising. These products will show adverts to users at specified intervals. To stop the adverts from showing, a premium version must be purchased.
The freemium model has become very popular on digital marketplaces such as iOS, Android, and Amazon. The gaming sector has made great use of this model even outside of these marketplaces, with games like Fortnite and The Elder Scrolls Online being available through the Epic Store and Steam digital platforms, respectively.
The beauty of the freemium model, especially limited function, is that it makes the onboarding process simple. Users transition to paying customers because they have experienced its value first hand, want to support its creators, and want access to more advanced features.
A great example of this is Google Penalty Checker. Created by Fruition, it’s an excellent tool that allows you to analyze how Google’s algorithm changes are affecting a website’s search rankings. This offers great value to individuals and businesses who want to see how to improve their websites’ ranking.
The freemium version allows users to do this for two websites, showcasing what the tool can do. In order to use it for more websites, you have to buy the premium version, which many have done.
Like freemium, an open source business model involves providing access to a product for free. Where it differs, however, is that the software is usually split into two. A dual licensing model is used to generate revenue.
Often referred to as “open core” this means that there is a community license and a proprietary one. The free, community version of the software is funded by the income generated by the proprietary license.
The proprietary license is offered to commercial businesses as “enterprise” level. This means that there are new features not available in the free version or that the developers will add in new features at the behest of customers to expand the program’s scope. These add-ons are then part of the proprietary license and won’t be available in the open source version.
An example of this is GitLab, a San Francisco based company that offers hosting services for software code. It was founded in 2011 in the Ukraine and in the beginning had only two employees.
A free open source version of GitLab is available for coders from around the world where they can keep track of their own code and share it with others. At the same time, a proprietary version generated over $10million in yearly revenue through enterprise level clients, resulting in a 3-year growth rate of a staggering 6,213%.
Most business models involve the outright purchase of a product so that the customer owns it forever. However, subscription models require a continual payment on the part of the customer. This is often called “software as a service” or SaaS for short. You’ll also see it referred to as “access over ownership”.
Digital businesses can offer a “software as service”, charging the customer X amount per month in order to access software features. A great example of this is the script writing software, Celtx. Created by Celtx Inc, Celtx began its life as a free to use script writing utility.
After building up a large user base, the company altered its business model to encourage monetization of the product.
Over the years, it morphed into a full suite of production tools for screenplay writing and film production. While a freemium version exists, the bulk of the business is now involved in positioning itself as SaaS. With revenue of $16.7million, it’s difficult to disagree with the results Celtx has generated.
Subscription based models provide businesses with a continual influx of income from each customer rather than a one off payment. This creates a level of stability in revenue rarely seen in other models, but competition for subscription fees is fierce.
When thinking about what is a business model ultimately the operator needs to think more towards building an operation that is repeatable and scalable.